Recap 8-21-13: Watch EU Stocks


Fed minutes were more hawkish than expected. Some market participants may have expected greater emphasis on a possible reduction in the UER threshold, but the minutes suggested that only a minority of members were supportive of that. Without any additional indication that FOMC members were uncomfortable with prevailing yield levels, treasuries continued to sell off, and took other assets with them.

Separately, barring an strong rally the rest of the week, the Eurostoxx 50 index is looking vulnerable. After making a new high last week, prices could not hold and have reversed lower. The last time this occurred was in early 2011:

Valuations are also quite rich. The forward P/E ratio is now at the highest level since late 2009. Unlike in 2009, however, when earnings expectations were increasing at a rate of ~25% on an annualized basis, current earnings estimate revisions are essentially unchanged.

With the ECB standing by and allowing interest rates to rise, (somewhat akin to their misguided hikes in April and July of 2011) the risks for EU equities appear to be to the downside.


  • FOMC minutes:
  1. In general, there was support for maintaining the current numerical thresholds in the forward guidance.
  2. A number of participants indicated, however, that they were somewhat less confident about a near- term pickup in economic growth than they had been in June.
  3. several participants expressed confidence that the housing recovery would be resilient in the face of the higher rates,
  4. It was noted that employment growth had been stronger than would have been expected given the recent pace of output growth, reflecting weak gains in productivity. Some participants pointed out that once productivity growth picked up, faster economic growth would be required to support further increases in employment along the lines seen of late.
  5. A number of others, however, viewed the low inflation readings as largely reflecting persistently deficient aggregate demand, implying that inflation could remain below 2 percent for a protracted period and further supporting the case for highly accommodative monetary policy.
  6. some participants felt that, as a result of recent financial market developments, overall financial market conditions had tightened significantly, importantly reflecting larger term premiums, and they expressed concern that the higher level of longer-term interest rates could be a significant factor holding back spending and economic growth. Several others, however, judged that the rise in rates was likely to exert relatively little restraint, or that the increase in equity prices and easing in bank lending standards would largely offset the effects of the rise in longer-term interest rates. Some participants also stated that financial developments during the intermeeting period might have helped put the financial system on a more sustainable footing, insofar as those developments were associated with an unwinding of unsustainable speculative positions or an increase in term premiums from extraordinarily low levels.
  7. the potential for clarifying or strengthening the Committee’s forward guidance for the federal funds rate was discussed. In general, there was support for maintaining the current numerical thresholds in the forward guidance.

US Existing Home Sales SAAR rose to 5.39mm vs 5.15mm exp and 5.08mm prev. This is the highest print since the home credit jump in 2010 and before that, 2002.

German Finance Minister Wolfgang Schaeuble tells a CDU election rally: “There will have to be another program in Greece.” He reiterates Germany’s opposition to a debt write-down


  1. The Reserve Bank of India says that it will buy long-dated government bonds worth INR 80bn ($1.2bn) through an open market operation on August 23rd and will decide after that on the amount and frequency of further operations as warranted. The rupee hit new lows today, down 1.25%.
  2. Bank Indonesia Deputy Governor Hendar says that “We see a liquidity risk in the banking sector.”

Upcoming Data:

  • Wed: China HSBC Mfg Flash PMI
  • Thu: EU PMI, US Jobless Claims, CA Retail Sales, US Markit Prelim PMI
  • Fri: UK 2Q GDP, Canada CPI, EU Consume Confidence, US New Home Sales
  • Mon: US Durable Goods Orders
  • Tue: German IFO, Fed’s Williams speaks, ECB’s Coeure speaks, US Consumer Confidence, ECB’s Asmussen speaks, South Korea Business Survey
  • Wed: BoE’s Carney Speaks, US Pending Home Sales, Australia Private CapEx